CU Tax Exemption May Draw Fire From New Budget Panel: Print Preview

Credit unions dodged a taxation bullet with the latest spending reduction package, but it remains to be seen how long their luck will hold.

On Aug. 2, President Obama signed legislation that cut spending and raised the debt ceiling, and at the insistence of congressional Republicans, didn’t raise taxes or close loopholes.

However, the bill set up a 12-member House-Senate committee empowered to make recommendations for $1.5 trillion in additional spending cuts and possibly eliminate tax expenditures. That’s where credit unions may have to play defense.

The panel’s recommendations, which cannot be amended, are subject to an up or down vote in both the House and Senate. If both chambers don’t approve, there will be automatic spending cuts will kick in.

At press time, none of the four congressional leaders had named their appointees to the panel. Both House Speaker John Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) have said they will only name committee members who oppose tax increases.

Obama, Senate Majority Leader Harry Reid (D-Nev.) and House Minority Leader Nancy Pelosi (D-Calif.) have said they would like to see tax increases on the table, and Reid and Pelosi are likely to name panel members who reflect that view.

However, there is still debate in Washington whether a tax increase can only be accomplished by raising rates or whether closing a loophole or tax expenditure, such as the exemption for credit unions, counts as well.

Grover Norquist, president of Americans for Tax Reform and a leading anti-tax activist, told The Daily Beast online magazine that “of all the things I’m worried about, the idea that the Republican House of Representatives will pass a tax increase is not on my list of things to worry about.”

CUNA Vice President Ryan Donovan said it was too early to tell how big a threat there is to the tax exemption.

He said the House-Senate panel could take some of its guidance from the House and Senate tax-writing committees and CUNA has spent extensive time lobbying those panels on the importance of keeping the exemption.

NAFCU Vice President Brad Thaler said it is important to remain vigilant because it is quite possible that there will be a situation in which everything will be on the table.

John McKechnie, a former senior official of CUNA and the NCUA who is now an independent lobbyist, said the House-Senate committee “could be subject to less political pressure than the regular committees and therefore it could be harder for lobbyists to make their case than in the normal legislative process.”

Lobbyists for CUNA and NAFCU said the possibility of a fight over tax exemption, coupled with other priorities such as raising the cap on member business loans, is causing them to ramp up their lobbying efforts when Congress returns next month.

CUNA has 12 Hike the Hill events planned in September alone with about 300 people scheduled to attend. There are also three scheduled in both October and November.

NAFCU said it is on track to have the highest attendance at its Congressional Caucus in five years but declined to say how many people have registered. Attendance at this year’s caucus could increase, as could the industry’s influence, because NAFCU is allowing nonmembers to attend at the same price as members.

Even if the House-Senate panel doesn’t touch the tax exemption, credit unions won’t be home free.

Obama and congressional leaders have talked about wanting to try to pass some kind of comprehensive tax reform. The goal of many is to broaden the base by cutting loopholes and reducing rates.

That effort probably wouldn’t take place until 2013, after the next presidential election. The last time there was a major tax overhaul in 1986, the credit union tax exemption was one of the items that was targeted but survived.

While the tax exemption is important to credit unions, the amount of revenue that eliminating it would raise wouldn’t make much of a dent in the federal deficit.

When the Treasury Department did an analysis in 2005, it estimated the annual revenue at $1.39 billion, while Congress's Joint Committee on Taxation estimated $1.30 billion.

The Tax Foundation, in a study funded by the Independent Community Bankers of America, concluded during that same year that that the annual revenues from such a tax could be as high as $3 billion.